NASHVILLE, TN -- Global beverage strategist Ross Colbert of Rabobank International keeps his finger on the pulse of the swiftly evolving single-cup brew-by-pack coffee market. He again shared his insights and projections with operators attending the recent National Automatic Merchandising Association Coffee Tea & Water show in Nashville. Rabobank, a global leader in food and agribusiness financing, has many clients from the office coffee service, roasting and consumer packaged goods segments, including giants like Aramark, Green Mountain Coffee, Kraft Foods, Lavazza and DE Master Blenders. These relationships give it deep insight into the "pod" market, a term Colbert uses to broadly represent all brew-by-pack formats.

Colbert informed operators that in 2012, Rabobank forecast that there would be "no clear winner" in single serve at that point. It also predicted that the market segment would reach $8 billion by 2017, mushrooming to two and a half times its 2012 size.

In 2012, the bank also predicted the advent of more multi-beverage dispensers in the future, and that mergers and acquisitions would continue to drive industry consolidation.

These predictions were spot on, with 2012 and 2013 being "transformational" years in coffee as shown by by Mondelez's split from Kraft Foods Group, the privatization of Caribou Coffee and Peet's Coffee & Tea and D.E. Master Blenders' spinoff from Sara Lee. Also noteworthy was Starbucks's purchase of Teavana and Evolution Tea and DS Waters' acquisition by new equity owners.

"By 2015, we may see this level of merger and acquisition activity again, after the market digests all of this," Colbert conjectured.

GROWTH DRIVERS

Colbert identified several factors driving global coffee demand. Among them is a shift from multi-serve to single-serve formats, both at and away from home. Brew-by-pack format innovations are also driving value growth in mature markets as consumers are paying more per cup, he added.

Proliferating out-of-home offerings are driving coffee demand, as consumers are willing to pay more for convenience, according to Colbert. Gourmet coffee shops continue to lose ground in specialty coffee to quick-service restaurants as they develop premium beverage programs.

Growth in global coffee demand is focused on differentiation, quality and "premiumization" within roast and ground coffee. Growing consumer favor accorded to premium offerings is demonstrated by the value placed on fair trade, health benefits, organic and local details on coffee origins, Colbert added.

"Consumer preference for convenience and quality are driving innovation in single-serve roast and ground brewing technology, which in turn is helping drive growth in the single-serve coffee market," Colbert said.

On a global basis, coffee consumption is increasing in emerging markets, where demand is forecast to reach 50% of worldwide coffee consumption by 2020. Growth of instant coffee is driven largely by emerging countries, according to Colbert.

Western Europe leads the global coffee market, both in value and volume sales. Asia-Pacific is second in value, but trailing North America, Eastern Europe and Latin America in ready-to-drink retail volume.

The brew-by-pack market is geographically concentrated, with penetration limited almost entirely to higher-income markets like Western Europe and North America. In 2012, North America and Western Europe, combined, accounted for more than 90% of the global "pod" market.

At more than $5 billion, the market for coffee "pods" in Western Europe is still almost twice as large as that of North America. But North America is increasing its use of single-cup packs at a much faster rate, recording a 105% growth in value in 2012, compared with Western Europe's 12% increase. Colbert projects that the U.S. will surpass Europe in single-cup value within 18 months.

Global coffee's increase in retail value has been driven by "pod" growth, according to Colbert. Between 2007 and 2012, "pods" expanded in value by an average annual rate of 26%, or eight times faster than the remaining coffee categories combined.

"'Pods' are actually benefiting from the recession," Colbert said."Consumers are not spending money in cafés, but purchasing pod coffee machines in order to replicate the café experience at home for a better value."

Coffee styles are different around the world and single-cup formats remain fragmented, Colbert observed. Nespresso continues to be the leader in global "pod" value, with a nearly 26% share. Keurig holds the No. 2 spot and is closing in fast, despite a market that, so far, has been limited primarily to North America, according to the beverage market expert.

After North America, Latin America was the fastest-growing region for coffee in 2012. "Pods," however, accounted for only 2% of the Latin American fresh coffee market, recording $154 million in sales, with a presence in only six countries: Argentina, Brazil, Chile, Colombia, Mexico and Uruguay. While Brazil accounts for 69% of brew-by-pack sales in Latin America, single-serve coffee still made up only 2% of the Brazilian fresh market in 2012.

The price of a cup of portion-pack coffee in Latin America was more than three times the price of any of the types of non- "pod" coffee, Colbert said.

Nespresso enjoys the widest global penetration of any major "pod" brand, but its presence in the rapidly-growing North American market remains limited. Since 2009, Nespresso's share in North America has declined from 5% to 3%, according to Colbert.

The beverage market analyst speculated that Nespresso will continue to be challenged outside of Europe. By registering patents for every aspect of the Nespresso system, Colbert explained, Nestlé aimed to prevent other companies from manufacturing Nespresso-compatible "pods." With so many layers of protection, other companies have struggled to compete with Nespresso for share of the "pod" category.

GLOBAL LEADERS

The top five global brands in terms of value in 2012 were Nestlé's Nespresso, followed by Green Mountain's Keurig, D.E. Master Blenders' Senseo, Nestlé's Nescafé Dulce Gusto and Mondelez's Tassimo. The top global pod brands, by volume, were Senseo followed by Nespresso, Keurig, Nescafé Dulce Gusto and Tassimo.

The U.S. market represents more than 25% of the global retail value of pods, followed by France and Germany. Coffee pod volume is led by France, followed by Germany, the Netherlands and the U.S.

Colbert said single-serve "pod" volume in "unmeasured" channels like office coffee service, warehouse clubs, office supply stores and foodservice may account for as much as 65% of total single-serve pod sales. However, Packaged Facts' latest data puts "pod" volume sold through measured channels like supermarket and grocery stores at 59%.

K-Cup sales have played a big part in driving the retail coffee category to $8.2 billion in 2013 from $5.8 billion in 2011, the beverage analyst noted. The single-cup subcategory generated nearly $860 million in sales for the year ended July 14, 2013, up more than 60% over the prior year, and now constituting 25% of the total U.S. coffee category, according to IRI data.

Single cup was the only segment in coffee that grew share in the past 12 months. K-Cups represented just 6% of the coffee market in 2011; in 2013, they represented 26%.

The U.S. single-serve retail market is dominated by Green Mountain Coffee, despite a loss of share to other brands. In December 2012, K-Cup sales made up 53% of the single-cup market; in September 2013, the figure had dipped to 41.1%. Folgers, the second largest single-cup brand, lost share as well, from 19% in 2012 to 14.3% in 2013. Starbucks' share held steady at 14.3% in 2012 and 14.2% in 2013.

The Rabobank analyst noted that single-cup category growth has slowed by more than 62% in the past year to 46% in late summer, after growing 124% in June 2012 from the previous year. Colbert projected growth to slow even further in the coming months.

Colbert said K-Cup retail prices appear to have stabilized, and are segmented into three tiers. Premium Peet's and Starbucks brands (86¢ and 80¢, respectively) are priced 43% higher than middle-range brands like Caribou, Green Mountain, Kraft and Eight O'Clock (54¢ to 62¢ range). Private-label and "other" brands typically cost 25% less than middle-tier brands like Green Mountain.

Private-label "pod" penetration is still low but expanding in the U.S., and is expected to reach 12% share in 2014. The expiration of Keurig patents in 2012 and overturned legal challenges to Nespresso exclusivity in Germany have resulted in a host of new private-label brands using the Keurig and Nespresso formats, Colbert said.

In the U.S., key retailers Safeway, Wegmans, Kroger and Costco have entered the "pod" category using the K-Cup format. "Over time, it is likely that U.S. retailer unlicensed brands will increase from their current 8% to 10%, to 12% share of the 'pod' category," Colbert projected.

The beverage expert probed whether there is still room for a new player in single-serve coffee systems. The market currently encompasses patented systems like Keurig and Flavia, among others, along with "patent breakers" such as D.E. Master Blenders that have created compatible cups and machines for the Nespresso system. Among the newest systems are Keurig's Vue and Starbucks' Verismo.

"I believe there's still room, but players have to come in with eyes wide open to the rapidly changing landscape," Colbert said.

One of those players is McDonald's, which recently announced a partnership with Kraft for retail distribution of McCafé Premium coffee in U.S. supermarkets in 2014. The deal includes the McCafé single cup, which Colbert said is expected to be in the Tassimo brewer format.

Looking ahead, Colbert said single serve's next generation will combine coffee, specialty beverages and cold soft drinks. Green Mountain, Soda Stream and Bevyz are the companies paving the way for future innovation.

The Coca-Cola Co. has signed a 10-year agreement to develop its iconic soft drink brands for single-cup use in Green Mountain Coffee Roasters' Keurig Cold at-home beverage system, set to launch in 2015.

"Choice, convenience and consistency will continue to drive consumer demand," said Colbert.

Set to launch in 2015 is the Keurig 2.0, featuring four systems: hot, cold, specialty and water, with multiple platforms and Green Mountain and licensed partner brands for each one." They'll have global applications and common components," said Colbert.

Regionally, according to Colbert, the biggest growth potential for pods is in Miami, Los Angeles, Atlanta and San Francisco. Boston is the most saturated market, with 22.6% of households using Keurig; Philadelphia is a close second at 19.4%; and New York and Washington, DC, follow at 15%.

AMBITIOUS GOAL

A question weighing on the minds of many operators, market analysts and investors alike is just how big Green Mountain will get. "Green Mountain's vision is 10 times the current market by 2018," Colbert told CTW showgoers.

In 2013, there were 16 million Keurig brewers, with 18% household penetration and 1.4 servings per household consumed daily. The Waterbury, VT, roaster's goal, according to Colbert, is 90 million households with a beverage system, consuming 14 hot, sparking and cold still drinks daily by 2018.

"It's a very ambitious goal. I want to see them succeed; it could be transformational for our industry," Colbert said.

He reported that Green Mountain is in phase one of its international rollout in 14 countries. The UK, Sweden, South Korea and Australia are its first priorities for 2014 and 2015, Colbert said.

Other players to watch in the single-cup space are Bevyz, SodaStream and Mars. Colbert said deals are likely between the drink system makers and major appliance companies. "There will be a hot, cold, still, beverage dispenser in refrigerator doors," he said."We're not far from that. Everyone's watching what the innovation pipeline is bringing to market."

Colbert also anticipates strategic partnerships in espresso as companies like Illy and Lavazza devise strategies to fit within the new landscape.

"Expect more mergers and acquisitions," Colbert concluded. "A lot of private-equity investors are excited about coffee, especially pods, with good reason."